Budgeting in Slovenia

ISSN 1608-7143 OECD Journal on Budgeting Volume 4 No. 4 OECD 2005 Budgeting in Slovenia by Dirk-Jan Kraan and Joachim Wehner* * Dirk-Jan Kraan is Project Manager in the Budgeting and Public Expenditures Division, Public Governance and Territorial Development Directorate, OECD. Joachim Wehner is an Independent Researcher in the Department of Government of the London School of Economics and Political Science. 55

Preface This review of the Slovenian budget system was carried out as part of the Budget Project of the Working Party of Senior Budget Officials (SBO). The Budget Project aims to initiate and foster regional networks of Senior Budget Officials outside the OECD area. This review served as a basis for the examination of the Slovenian budget system at the first meeting of the network of Senior Budget Officials of Central and Eastern Europe, held on 10-11 November 2004 in The Hague. A mission comprising Mr. Dirk-Jan Kraan and Mr. Joachim Wehner visited Ljubljana in September 2004 to carry out the review. During its visit the mission met with the Minister of Finance, Dr. Dusan Mramor, and with senior officials from the Ministry of Finance and two line ministries. The mission also met with the Chairman and staff of the Committee on Finance and Monetary Policy and the Commission for Budgetary and Other Public Finance Control of the National Assembly (the directly elected Chamber of the Slovenian Parliament), with the Second Deputy President and staff of the Court of Audit, with the Director of the Institute of Macro-economic Analysis and Development (IMAD), and with members of the boards of the Associations of Municipalities. The mission would like to express its gratitude and appreciation for the warm and cordial reception by the Slovenian authorities and the frank and useful discussions with Slovenian officials. In particular the mission would like to express its thanks to Dr. Dusan Mramor, the Minister of Finance, Mr. Ciril Pucko, the Chairman of Parliament s Committee on Finance and Monetary Policy, Mrs. Zdenka Vidovic, the Second Deputy President of the Court of Audit, and Mr. Boris Sovic, the Mayor of Maribor, for the generous time they shared with the mission during its stay in Ljubljana. Finally, the mission would like to thank Mr. Bojan Pogacar, Adviser to the Minister, Mrs. Helena Kamnar, State Secretary for the Budget, and Mrs. Irena Sodin, State Undersecretary for the Budget, for organising the mission s visit. Furthermore, the mission expresses special thanks to Miranda Groff Ferjanic, Adviser to the Minister, for her contribution to the organisation of the mission and her unsparing help and assistance during our stay in Ljubljana. The OECD would like to thank the German Gesellschaft für Technische Zusammenarbeit (GTZ) and the German government for their financial and 56

personnel support of this review and their general support for the OECD Budget Project. The views expressed in this report are those of the OECD Secretariat and should not be attributed to any organisations or individuals consulted for this review. 1. Introduction 1.1. General characteristics Slovenia is a young country. It came into existence as an independent State in 1991 after a short war against the Yugoslavian army. In its short history as an independent State it has experienced an amazing development. It has developed its public sector institutions almost from scratch, including its constitution, major organic laws, and working processes of the major organs of the State. At the same time, it has privatised almost its entire manufacturing, financial and wholesale sectors. This process has been very successful and was crowned by the accession of Slovenia to the European Union on 1 May 2004. Slovenia is a relatively small country. It has about 2 million inhabitants and thus belongs with Cyprus, Estonia, Malta and Luxembourg as the countries of the European Union with less than 2 million inhabitants. Given its size, and the absence of any intermediate level of government between the central State and the municipalities, its public sector is relatively large. General government expenditure (including sub-national government) was 42.9% of GDP in 2003, but expenditure of sub-national government was only 5.0% of GDP. Abstracting from size however, Slovenia takes an intermediate position compared to OECD countries in this respect. Also this share of GDP has been fairly constant since 1996. Public expenditure in Slovenia is firmly under control. Thanks to a welldesigned budget procedure with strong institutional barriers against runaway programme expansion and overspending, deficits have remained low, even in the recent years of relatively modest real economic growth since 2000. It should be taken into account though that growth has remained relatively high in most EU accession countries during the slowdown experienced throughout the OECD area in the period 2000-03. Real gross domestic growth in Slovenia was well above the EU average in this period. Under these circumstances, the general government deficit has remained at a prudent level. Under these circumstances the government s debt is at a more or less stable level since 1996, well below the EU average. In 2003 it stood at 26% of GDP. 57

Figure 1. General government expenditures and revenues as a percentage of GDP 45 Revenues Expenditures 43 41 39 35 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: Bulletin of Government Finance Year V, No. 6, June 2004. Forecast Spring Report 2004, Institute of Macro-economic Analysis and Development (IMAD). Table 1. Real gross domestic growth as a percentage of GDP in the previous year 2000-03 and forecast for 2004-05 2000 2001 2002 2003 2004 2005 EU 15 3.4 1.5 1.1 0.8 2.0 2.4 Slovenia 4.1 2.7 3.4 2.3 3.6 3.7 Sources: EU 15: Economic Commission, Economic Forecasts, April 2004; Slovenia: Spring Report 2004, Institute of Macro-economic Analysis and Development (IMAD). Table 2. General government deficits 2000-03 and forecast for 2004 2000 2001 2002 2003 2004 EU 15 1.0 1.0 2.0 2.6 2.3 Slovenia 3.0 2.7 1.9 1.8 1.7 Source: Bulletin of Government Finance Year V, No. 6, June 2004. 1.2. Political environment Slovenia has an electoral system of proportional representation. Since independence, no party has held an overall majority in Parliament, so that governing coalitions have to be formed. The present coalition 1 consists of Liberal Democracy of Slovenia (LDS) and smaller parties (the largest among them is the United List of Social Democrats). LDS was also the strongest member of the previous coalitions since 1992. Although the cabinet is 58

Figure 2. General government gross financial liabilities as a percentage of GDP 1996-2003 30 Debt RS in % of GDP 25 20 15 10 5 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: Bulletin of Government Finance Year V, No. 6, June 2004. primarily supported in Parliament by the coalition parties, it also includes ministers who are not members of these parties and are chosen on the basis of their expertise, such as the present minister of Finance. The Slovenian budget process, while imbedded in the general democratic legislative institutions of the country, seems to run its course in a rather consensual political environment. Macroeconomic policy, including fiscal policy, seems to be a relatively uncontroversial area of general cabinet policy. Until the accession to the EU, the main efforts were directed at early and successful entry into the EU. Next to that, the main policy aim was to realise rapid economic growth above the EU average, in order to close the income per capita gap with the rest of the EU. Presently, as appears from the Budget Memorandum for 2004, the latter aim is still at the top of the political agenda, whereas simultaneously much attention is paid to the limitation of the macroeconomic and budgetary risks associated with EU entry. The governing coalition, although at the end of its mandate, has a very ambitious reform agenda, which stretches far into the next parliamentary term. This agenda entails among other things the complete overhaul of the tax system, the reform of the health care system, the rationalisation of the system of social transfers and the reallocation of budgetary funds towards infrastructure investment. This reform agenda also, seems to be relatively uncontroversial, so that it will probably stay in place more or less in its present shape, regardless of whether the coalition will remain in office. The consensual character of Slovenian fiscal policy also appears from the reasonably harmonious co-operation with the social partners and the subnational governments. In July 2003 the government has reached an agreement 59

with the social partners on public sector wage policy in 2004 and 2005, leading to a restrained growth of real wages in exchange for a more equitable distribution among public sector workers and an improved supplementary collective pension insurance system, which in the short term will contribute to savings and make room for public investment. Similarly, the co-operation of the municipalities with the national development programme is based on institutionalised consultation with the two associations of municipalities. The relatively stable political environment of the Slovenian budget process does not imply that the opposition does not bring forwards amendments to budget proposals. However, such proposals are mainly directed at concrete expenditures or fiscal measures and do not seem to embody deep ideological differences about fundamental aspects of fiscal policy, as exist in many OECD countries. 2. Budget formulation 2.1. Key characteristics of the Slovenian budgeting system It should be mentioned at the outset that the Slovenian budget system has two special features, which differentiate it from most OECD countries: First, in contrast to all OECD countries, Slovenia makes budgets for two consecutive years. Second, the Slovenian budget has a very detailed account structure, but still maintains flexibility during execution through a unique legislative device, called the Law on Budget Execution. Each of these features is briefly discussed below. 2.2. Budgets for two consecutive years Article 13a paragraph 1 of the Public Finance Act of the Republic of Slovenia (the organic budget law) stipulates that the government shall submit to the National Assembly, together with the proposed budget for the subsequent budget year, a proposed budget for the year that follows this. This budget has to include everything that the budget of the upcoming year has to include. Paragraph 2 of the same article specifies that if the budget under the preceding paragraph is accepted, the Government shall no later than 1 October of the coming year submit to the National Assembly a proposal for budgetary changes that are necessitated by significant alterations in the assumptions of economic development or the guidelines of economic and public finances policies. This procedure comes down to annual budgeting for two consecutive years on a rolling basis. It is thus not the case that Slovenia makes a biannual budget every two years. Rather it makes two annual budgets every year. 60

This way of budgeting on a rolling basis does not occur in the OECD area. The Slovenian authorities see as its main advantage that it contributes to budgetary discipline. This would be the case for two reasons. First, it would rein in the tendency of line ministries to bring forward requests for budget expansion for the upcoming budget year in the annual budget negotiations. Since the budget for the upcoming year has already been decided during the previous budget cycle, only a limited set of changes can be considered. Indeed, these changes have to be motivated by macroeconomic developments or by adjustments of general fiscal policy. Since both reasons for amendment can not easily be invoked by line ministries, but rather have to be established by the cabinet and in particular the Ministry of Finance, the room for additional spending requests for the upcoming budget is narrowed down substantially, if not eliminated. Second, the procedure would contribute to budgetary discipline because line ministries would be more willing to co-operate in reform initiatives directed at rationalisation and realisation of savings, if these initiatives apply to a period that is still more than a year in the future, than if these initiatives would apply to the upcoming budget year. Although the Slovenian system is quite unique, the reasoning behind it resembles in major respects the ideas that in a few OECD countries have inspired the so-called fixed expenditure frameworks. Particularly in Sweden and the United Kingdom, the government announces multi-year expenditure ceilings in the annual budget documents that cannot be changed from year to year, except for specific, predetermined reasons. These multi-year ceilings are confirmed from year to year on a rolling basis, with a new year added at the end of the medium-term framework each year. In the Netherlands, the government announces unalterable multi-year expenditure frameworks at the beginning of each parliamentary term for a period of four years. The idea is identical but the ceilings are not extended on a rolling basis but after expiration (once in four years). The Slovenian procedure resembles the fixed multi-year frameworks of some OECD countries because it provides tranquillity and a medium-term orientation to the budget process: the annual upheaval characteristic for budget negotiations in many other countries is avoided and reform initiatives have a better chance when they are planned far in advance. However, the Slovenian procedure does not realise another stated advantage of multiannual frameworks. It does not provide an automatic stabiliser, because it does not maintain expenditure ceiling regardless of macroeconomic circumstances, but on the contrary explicitly recognises the need to adjust the second year budget in the light of such circumstances. 2 It appears then that the Slovenian two-year budget procedure is not a first step on the way to fixed multi-year expenditure frameworks. Apart from the fact that the Slovenian second year budget is a complete budget rather 61

than an expenditure ceiling, 3 the Slovenian authorities seem to attach much value to a countercyclical stance in expenditure policy, that goes even further than automatic stabilisation. In this respect they refer to other EU countries that in recent years have taken a similar course, even though in some cases such policies have been hard to reconcile with the deficit ceiling of 3% of the EU Stability and Growth Pact. Slovenia, though not in the Euro zone, does want to respect the requirements of the pact, given its aim to adopt the Euro in 2007. However, in the view of the Slovenian authorities this does not preclude an active fiscal policy aimed at macroeconomic stabilisation. Indeed Slovenia has more leeway in this respect than some other EU countries, because both its structural and nominal deficits are well below the 3% ceiling. In sum, the Slovenian two-year budget procedure is the outcome of a unique compromise between the aim to provide tranquillity and a mediumterm orientation to the budget process and the need to maintain flexibility in the face of macroeconomic circumstances and new developments. In its present form the procedure is explicitly not meant as an automatic stabilisation device. 2.3. A detailed account structure The account structure of the Slovenian budget is complex. According to the Public Finance Act the budget consists of a general part, a special part and a development programmes part. The general part applies to both direct and indirect budget users and contains the macro-budgetary totals of the central government: revenues, expenditures, liabilities and means of financing. The direct budget users are all bodies and organisations that are financed by the State budget, mainly the ministries with their administrative bodies and organisations, as well as independent bodies such as Parliament, Court of Audits and all the judicial bodies (all together more than 250). The indirect budget users are the State funds, public institutions and agencies founded by the central government (but not being financed by the State budget). The special part contains the financial plans of the direct budget users. The general and special part of the budget contains estimates for the budget year as well as estimated outcomes for the two preceding years (Article 10 paragraph 5 of the Public Finance Act). 4 The development programmes part contains the planned annual expenditures for investments and State aid of direct budget users in the subsequent four years (including the budget year), as required by the long-term development planning documents, special laws or other regulations. It is the responsibility of the budget users to see to it that their long-term development plans are adjusted in accordance with the development programmes part of the budget. It follows from this set-up that the budget year slice of the expenditures of the direct budget users that figure in the development programmes part of 62

the budget (mostly capital expenditures), are shown twice: once in the special part and once in the development programmes part. The financial plans of the indirect budget users and of the Health Insurance Institute of Slovenia (the health insurance fund) and the Retirement and Disability Pension Insurance Institute of Slovenia (the social insurance fund) are not part of the budget, but have to be submitted to the National Assembly together with the budget (and the Budget Memorandum). Both the budget and the financial plans of the indirect budget users and health and social insurance funds show estimates for the budget year but not for subsequent years. Multi-year estimates only figure in the development programmes of the direct budget users for a limited group of expenditures (capital expenditures, State aid, grants, projects financed through EU structural funds). 5 The special part of the budget consists in the financial plans of the direct spending units and is divided into: budget expenditure areas; main programmes; sub-programmes; budget items; account sub-groups; accounts. The subdivisions at the first three levels are mainly programme oriented. The subdivision at the account sub-groups level is based on the economic classification (salaries, goods and services, transfers, subsidies, etc.). In total there are some 9 000 budget lines at the lowest level of aggregation (accounts). The Slovenian authorities explain the detailed account structure of the budget by the necessity to hold a firm grip on spending and by the fact that Slovenia did not want to give up input control while moving towards a more outputoriented budget (the present account structure appears a cross table of an input and output classification). The detailed account structure of the special part of the budget makes it necessary to provide for special procedures to allow reallocation during budget execution in order to cope with new developments. These procedures make it possible to shift expenditures between accounts without formally changing the budget trough supplementary legislation. The rules and constraints for these reallocations are laid down in the Law on Budget Execution. This is a law which is submitted annually to the National Assembly together with the budget (more below). The budget itself is not a law but it has special status and is obligatory. 63

2.4. Annual budget process In Slovenia the annual procedure for budget formulation is prescribed in an executive decree, namely the Decree on the Bases and Procedures for Preparation of the Proposed National Budget. It prescribes among other things: the time schedules and procedures for the preparation of the economic forecasts, the Budget Memorandum, the budget including the financial plans and development programmes of the line ministries and the indirect budget users and the budget amendments. The budget year in Slovenia coincides with the calendar year. Annual budget formulation starts with the release of the spring economic forecasts, which is due by 15 April. According to the abovementioned decree it should take account of the statistical data on the development of gross domestic product in the final quarter of the previous year, but in fact it also takes into account the statistical data of the first quarter of the current year. The forecasts should include estimates of macroeconomic aggregates for the current year and the following two years and the scenario for the next three years. It should also include an assessment of the principal risks for their realisation and a conservative assessment of the possible consequences of these risks. The economic forecasts are made by the IMAD, which is a semiindependent economic forecast bureau, modelled after the Swedish Konjunkturinstitutet and the Dutch Central Planning Bureau (see Box 2). The Ministry of Finance is responsible for the revenue forecasts that are used in the budget. The Ministry of Finance has a staff of around 500 of which about 40 in the Budget Department. A systematic approach to revenue forecasting started in 2003. The forecasting division of the Budget Directorate uses basically the IMAD numbers for the development of domestic production but it may also look at the forecasts of other macroeconomic forecasting institutes, such as the Bank of Slovenia and the Economic Institute of the University of Ljubljana. The forecasting division claims to put up conservative estimates but there is no explicit use of a prudence factor, such as practiced by certain OECD countries (for instance, Canada and the Netherlands). The revenue forecasts have to be prepared within two weeks after the IMAD numbers have become available. Projections are made for both actual revenues and cyclically adjusted revenues. Trend estimation is complicated by the fact that only 11 reliable observations (of previous years) are available. The division also makes long-term forecasts for the next fifty years. The revenue forecasts are used to draft the Budget Memorandum. This document has to be tabled at the First Budget Session of the Government, which has to begin by 15 May. The Budget Memorandum includes the overall nominal expenditure framework of general government (including health and social insurance and sub-national government). The framework states the 64

Box 1. Budget formulation timetable April The Institute of Macro-economic Analysis and Development (IMAD) releases the spring economic forecasts. April-May May May-June June Preliminary discussions between Ministry of Finance and line ministries about priorities in new budget year (the year after the upcoming budget year) and amendment of the budget for the upcoming year. The Prime Minister, Minister of Finance and Director of IMAD present the draft Budget Memorandum in the First Budget Session of the Government. The cabinet decides about overall nominal expenditure framework for the new budget year (including target numbers for the deficit or surplus) and guidelines for supplementing the draft Budget Memorandum (including national priorities for the budget period). Meetings between Ministry of Finance and line ministries about the distribution of expenditures by budget user, budget expenditure areas (24) and main programmes (95) for the new budget year and amendment of the budget for the upcoming year. On a proposal of the Minister of Finance, the cabinet decides in the Second Budget Session of the Government about the distribution of expenditures by budget user, budget expenditure areas (24) and main programmes (95) for the new budget year and amendment of the budget for the upcoming year. Within ten days after the end of the Second Budget Session, the Ministry of Finance sends a circular to the budget users about the preparation of the financial plans and development programmes. June-August Submission of financial plans and development programmes by line ministries to the Ministry of Finance. September September The Minister of Finance submits the budget for the new budget year, the Budget Memorandum and proposed amendments of the budget for the upcoming year to the cabinet. The Government submits the budget for the new budget year, the Budget Memorandum and proposed amendments of the budget for the upcoming year to the National Assembly. 65

Box 2. The Institute of Macro-economic Analysis and Development (IMAD) IMAD is a semi-independent institute belonging to the government. It employs approximately 60 economists. It is responsible for the spring and autumn economic forecasts. Its director is responsible, together with the Prime Minister and the Minister of Finance, for the formulation of the draft Budget Memorandum, including the expenditure framework that is decided in the First Budget Session of the Government, and takes part in the cabinet discussion at that occasion. The IMAD also publishes economic studies on specific projects and government programmes. It also plays an important role in the development of the Economic Development Strategy of Slovenia and is responsible for the annual Development Report that monitors the progress of the Economic Development Strategy of Slovenia. IMAD also advises about many other long-term development plans for agencies and institutions in Slovenia. IMAD seeks to give advice that is based on the best available economic expertise and that is strictly objective without any political bias. consolidated totals of expenditures and revenues by economic classification and the target amounts of the deficit or surplus for the following four years as well as the target level of the national debt for this period. The Budget Memorandum is drafted under the responsibility of the Prime Minister, the Minister of Finance and the Director of IMAD. The expenditure framework included in the Budget Memorandum can be seen as a flexible multi-year expenditure framework as employed by most OECD countries. It can be adjusted from year to year on a rolling basis in the light of economic circumstances and new developments. The Budget Department is responsible for expenditure forecasting, which is done on the basis of macroeconomic forecasts produced by IMAD and through preliminary collection of data from line ministries. These data have to take into account all legislation in force and envisaged legislation which has financial consequences. So the period up to 15 May is also used for discussions between the Ministry of Finance and the line ministries about their future plans. All the proposals of line ministries have to be transmitted to the Ministry of Finance and will be reflected in the draft Budget Memorandum in so far as they are approved by the Ministry of Finance and can be accommodated within the overall expenditure framework. In the First Budget Session of the Government the cabinet discusses the draft Budget Memorandum. Apart from the overall expenditure framework, the Budget Memorandum contains the national development priorities and 66

67 Department for Capital Markets, Export Financing and Other Financial Matters International Finance Department Financial System Directorate Department for Banking, Insurance and Payment System Office of the Minister Public Debt Management Department Department for Management of State Financial Assets Treasury General Ledger Department for Treasury System Development Figure 3. The structure of the Ministry of Finance Internal Audit Service Treasury Directorate Single Treasury Account MINISTER Directorate for the System of Tax, Customs and Other Public Finance Revenues Department for Tax and Customs Policy and Legislation Department for Administrative Procedure at II Degree in Tax and Customs Matters Financial Service Legal Office General Secretariat Information Technology Department Budget Department Department for Management of EU Funds Department for Capital Budgeting State Aid Monitoring Department Department for System of Financing Local Communities Macroeconomic Analyses and Governmental Accounts Department Fiscal Forecasting Department Department for Public Procurement and Concessions Human Resources Directorate for Budget and Public Accountancy General Service Public Accounting Office Department for Analytical Accounts Department for Budget Accountancy Department for Calculation and Payment of Labour Costs Department for Budget Users Accountancy BUDGETING IN SLOVENIA

Box 3. Long-term planning documents The Decree on the Bases and Procedures for Preparation of a Proposed National Budget designates the Economic Development Strategy of Slovenia and other long-term development planning documents, together with the Budget Memorandum, as the strategic framework for the preparation of the annual budget. The Economic Development Strategy of Slovenia contains long-term objectives and the target development scenario as well as basic operational policies in the separate areas of State activity. The strategy is described as a comprehensive indicative document which takes account of social, spatial, environmental, regional, sectoral and other potentials, limitations and conditions. The strategy is adopted and updated by the government on the proposal of the director of IMAD. The implementation of the strategy is monitored by annual development reports of IMAD to be released in February. Apart from the Economic Development Strategy of Slovenia, there are a number of other long-term planning and development programmes in use: the Development Programme of the Republic of Slovenia, regional development programmes, other development programmes, spatial plans, the pre-accession economic programme and the Single Programming Document. The relationships between these documents and their relevance for fiscal policy are not always clear. A certain streamlining of long-term planning procedures could contribute to transparency. the overall distribution of expenditures (estimates) for budget expenditure areas (24) and main programmes (95) for the next four years. This implies that the Cabinet determines the nominal expenditure ceilings and the deficit or surplus for the following four years as well as the priorities for the budget period. After consideration of the Draft Budget Memorandum, the cabinet issues guidelines for supplementing (elaborating and adjusting) the Draft Budget Memorandum. This leaves some room for subsequent negotiations with ministries and budget users within the constraints of the overall expenditure framework. Immediately after the First Budget Session of the Government the Ministry of Finance meets again with the line ministries in order to reach agreement about the estimates to be included in the budget. These meetings focus on the 24 budget expenditure areas and 95 main programme areas distinguished in the budget memorandum, as well as on the total amounts for budget users. This is the main period of budget negotiations. 68

Apart from the new budget (which is the year after the upcoming budget year), the discussions with the line ministries may also involve the required amendments for the upcoming budget (which has already been adopted by Parliament in the preceding year). Here the constraints are even narrower than for the new budget. Whereas the constraint for the new budget is primarily the overall expenditure framework adopted in the First Budget Session, the constraint for amendment of the budget for the upcoming year consists in the restricted criteria for amendment. These criteria are: 6 substantive changes in the economic development assumptions; changes in the guidelines of economic and public finance policy; substantial deviation of the assessed implementation of the current budget from the adopted budget (for the upcoming year). These criteria imply that room for amendment only exists if and insofar as the cabinet has established such room. The Second Budget Session of the Government has to begin by 15 June. At this session the cabinet decides about the distribution of expenditures (limits/ceilings) by budget user, budget expenditure area and main programme. The cabinet has to make this decision in the light of the national development priorities established in the First Budget Session. Furthermore the cabinet has to respect the overall expenditure framework established in the First Budget Session, so that as a general rule an increase in expenditures for a specific main programme requires a reduction of expenditures in other main programmes. In practice however, limited adjustments of the overall expenditure framework have occurred. The cabinet may also decide about amendment of the already adopted budget for the upcoming year. After the Second Budget Session of the Government the Ministry of Finance will issue a circular prescribing the procedures and dates for preparation of the budget. The circular includes 7 the agreed estimates by budget user, budget expenditure area and main programme and instructions and deadlines for the preparations of financial plans and plans of development programmes of budget users. Financial plans have to contain the expenditure estimates up to the account (line item) level, categorised according to the economic and programme classifications. They have to take into account the distribution of expenditures by budget user, budget expenditure area and main programme as decided in the Second Budget Session of the Government. Explanations of financial plans have to include: 8 a summary of the long-term objectives of the main programmes and subprogrammes of each expenditure area; 69

Box 4. Budget formulation in the line ministries Line ministries prepare their budgets in three phases. The first focuses on the preliminary discussions with the Ministry of Finance. In these discussions, they present their overall priorities for the coming years. These include major initiatives for the reform of substantive laws and the budgetary consequences of these reforms. In the second stage, after the First Budget Session of the Government, the line ministries discuss with the Ministry of Finance the concrete expenditure estimates on the level of budget users and main programmes. This may concern the new budget, but also amendments to the budget for the upcoming year, already adopted in the preceding year. Finally, in the third stage, after the Second Budget Session of the Government, the line ministries prepare their financial plans and plans of development programmes on the line item level. Financial plans and plans of development programmes have to be consistent with the budget preparation circular of the Ministry of Finance. Financial plans of indirect budget users resorting under the ministry have to be discussed and agreed with the representatives of this funds, public institutions and agencies. Financial plans are prepared by the financial division of ministries, but large agencies or divisions within a ministry and indirect budget users have their own financial divisions. Since 2003, financial plans are communicated to the Ministry of Finance through the new SAPPrA software. After some initial difficulties, the software was improved and now provides a useful tool. The summer and autumn is also used to prepare the new substantive legislation, which is assumed in the budget. Sometimes this legislation has to be negotiated with the social partners in the Economic and Social Council. Other substantive legislation may require negotiations with representatives of executive establishments (hospitals, educational establishments, etc.). a review of the projects, activities and investment projects undertaken to reach the long-term objectives; physical, financial and descriptive indicators used to measure the realisation of the objectives; a report on the results achieved in the first part of the current budget year. The government has to submit the Budget Memorandum and the proposed budget before 30 September to the National Assembly. However, this year (2004) no budget and Budget Memorandum have been submitted in view of the elections for the National Assembly that will take place in 70

October 2004 (there is already an approved budget for 2005). It is up to the new cabinet to submit a budget at a later date. Within fourteen days after the publication of statistical data about the development of GDP in the second quarter of the current year or by 15 October at the latest, IMAD has to release the autumn economic forecast. The forecast should include estimates of macroeconomic aggregates for the current year and the following two years and the scenario for the next three years, as well as a risk assessment. The consequences of the autumn economic forecast should be taken into account in the formulation of the supplemental proposed budget during the parliamentary stage of the budget process (see Section 3). 2.5. Conclusions Public expenditures and the general government deficit in Slovenia are firmly under control. This is mainly due to a two-stage budget formulation process in which an overall expenditure framework is established by the cabinet before the start of negotiations with line ministries. This amounts to an effective top-down steering mechanism which keeps expenditures in check and at the same time provides for sufficient flexibility to accommodate new priorities. The Slovenian budget procedure has the unique characteristic that it requires the annual formulation of budgets for two consecutive years. This procedure provides tranquillity and a medium-term orientation to the budget process. In this respect it resembles somewhat the fixed medium-term frameworks that are in use in certain OECD countries. On the other hand it is explicitly not aimed at automatic stabilisation. The Slovenian authorities may consider limiting decision-making about the second year budget to expenditure ceilings for general government and a limited number of subsectors. This would remove the necessity to amend the second year budget at the line item level during the subsequent budget cycle and still maintain the tranquillity and medium-term orientation to the budget process. The Slovenian authorities may also consider whether they want to maintain their active anti-cyclical stance in expenditure policy rather than opting for a more acyclical stance as results from a fixed expenditure framework. The aggregate levels of the budget classification provide a transparent picture of the spending programmes of the government and facilitate the decision making process during budget formulation. The input oriented line items guarantee at the same time that the cabinet and ministers hold a firm grip on spending. Nevertheless the Slovenian authorities may consider whether it is necessary for that purpose to maintain the present level of detail in the account structure. It seems possible to simplify the account structure substantially without losing control on spending on inputs. 71

It would be useful to integrate multi-year estimates at the line item level in the budget, rather than having them only on the more aggregate levels in the Budget Memorandum. This would contribute to the transparency of the budget documents but supposes a certain simplification of the account structure at the line item level. The Institute of Macro-economic Analysis and Development is an excellent centre of economic expertise that belongs to the top-class of forecasting institutes in the world. It provides objective information of high quality to the budgetary authorities and ensures that the Slovenian budget is realistic and supportive of the economic development of the country. The Slovenian Ministry of Finance may consider including an explicit prudence factor in its revenue forecasts. The Slovenian authorities may consider the further consolidation of the budget. In particular it may contribute to transparency and to the effectiveness of the budget process to integrate the financial plans of the State funds, public institutions and agencies at the central level outside the State budget into the central government budget. The Slovenian authorities may consider a certain streamlining of the arsenal of long-term planning documents that is presently in use. Some of these documents do not seem to be very effective. 3. Legislative approval 3.1. Budgetary powers and legal framework The Public Finance Act requires the Government to table the draft budget in the National Assembly by 1 October preceding the commencement of the relevant fiscal year (Article 27). In accordance with the Act, the government also supplies a set of budget documents to the National Assembly (Article 13). These include the Budget Memorandum, the proposed central government budget, information on proposed planned sales of central government assets, financial plans for the health fund as well as the pension and disability fund, and the bill on budget execution. In the first few years after independence, the National Assembly formally adopted the Budget Memorandum, but this contributed to long delays and delayed approval of the budget. Under the current system the Budget Memorandum is no longer approved, although parliamentarians may still engage in commentary on its contents. According to the Public Finance Act, the National Assembly is obliged to adopt the budget ahead of the start of the relevant fiscal year (section 29). However, should the budget not be approved in time for the beginning of the fiscal year, the Constitution (Article 148) and the Act (Article 32) allow interim spending in line with the previously approved budget. According to the Public 72

Box 5. The Slovenian Parliament Slovenia has a bicameral Parliament consisting of the National Assembly (Drzavni Zbor) and the National Council (Drzavni Svet). The National Assembly is composed of 90 deputies elected by popular vote for four-year terms. In the 2000 elections, 40 deputies were directly elected and 50 were selected on a proportional basis. The ratio of directly elected and proportionally determined seats varies with each election. One deputy each is always elected from the Italian and Hungarian ethnic communities. The National Assembly appoints the Prime Minister. The Cabinet or Council of Ministers is nominated by the Prime Minister and elected by the National Assembly. The National Assembly is the pre-eminent chamber in budgetary and other legislative matters. The National Council is primarily an advisory body based on corporatist principles. It has 40 members who represent social, economic, professional and local interests. Members are indirectly elected to five-year terms by an electoral college. The National Council may, within seven days of the passing of a law and prior to its promulgation, require the National Assembly to decide again on such a law. In deciding again, a majority of all deputies must vote for such a law to be passed unless the Constitution envisages a higher majority for the passing of the law under consideration. Such a new decision by the National Assembly is final. This procedure can in theory be applied to the Law on Budget Execution, but in practice this does not occur. Sources: Constitution of the Republic of Slovenia; World Fact Book 2004. Finance Act, such temporary financing is initially limited to a three-month period, which may be extended by the National Assembly on the proposal of the Government (Article 33). During the 1990s, the adoption of the budget was frequently delayed but in recent years approval has been timely. 9 The powers of the National Assembly to amend the budget are restricted and disallow an increase in the deficit proposed by the Government. The Public Finance Act prohibits amendments to increase expenditures without offsetting increases in revenues or expenditure cuts elsewhere in the budget. Moreover, the act specifically disallows the financing of expenditure increases through cuts in the budget reserves (Article 30). 3.2. Parliamentary process The Rules of Procedure of the National Assembly have been recently reformed and establish a strict timetable for the consideration of the budget (Rules 155-165). Following the presentation of the draft budget by the Minister 73

of Finance, it is referred without debate to the committees of the Parliament. For the 2000-2004 parliamentary term, the National Assembly appointed ten standing committees that generally correspond with individual ministries or cover inter-related areas. The various parliamentary committees have ten days to formulate proposals for amendments, but only to the relevant parts of the budget that fall within their jurisdiction. During the committee stage some spending ministers might attempt to convince Parliament to increase their budgets, although chances are small that they will succeed. Amendment proposals have to be tabled in writing and include a statement providing reasons for suggested changes. Although the Government is formally not allowed to table amendments during this process, sympathetic Members of Parliament might be co-opted to sponsor amendments. Following the ten-day consideration period for sectoral committees, the Committee on Finance and Monetary Policy exercises a co-coordinating function. This committee has an additional five days to deliberate on and coordinate various amendment proposals. The finance committee consists of 19 members and is chaired by a member of the governing coalition. It has limited logistical backup. No specialised budget analysts are attached to the legislature, and the finance committee is served by only two staff members, a secretary and a consultant. The latter is not a budget expert, however, because the consultant also has to service the committee s wider remit that includes subjects such as banking and monetary affairs. Based on the committee s review of the budget and various amendment proposals, it prepares a report to the President of the National Assembly. Thirty days after the tabling of the initial draft budget, the Government reacts to the report of the finance committee and tables a second budget proposal that responds to the amendments put forward by members. At this point, the Government will have to highlight which amendments it does not accept, and provide reasons for any objections. Different amendment rules apply during this second round of parliamentary considerations. Since the reform of the Rules of Procedure of the National Assembly in 2001, only the relevant committee, one quarter of Members of Parliament and party groups can propose amendments during this stage. Any amendments are voted on during a plenary session that follows within 15 days after the tabling of the Government s second budget proposal. At the end of the plenary session, if there are doubts whether the budget is in balance, the finance committee and the Government are requested to submit an opinion. If the budget is not in balance, i.e. should there be a mismatch between revenue and expenditure totals, the Rules of Procedure of the National Assembly outline a separate procedure whereby the Government and the finance committee would work towards establishing a balance 74

(Rule 163). Should the budget not be approved, the Government must submit a new budget within a time period set by the National Assembly. In particular during the first year of a new Parliament, members are eager to demonstrate activism and up to about 400 amendment proposals may be generated. As about one third of Members of Parliament are at the same time mayors of local authorities, the amendment process is seen as an opportunity for the mayors to direct spending, in particular investment spending, towards their constituencies. At the end of the process, however, only about five to ten of all proposed amendments are typically adopted. Members of the governing coalition are more likely to table successful amendments, and they may be able to exert more subtle influence on spending priorities. In practice, the Government is usually requested to support members in identifying a relevant source for financing the cost of increases in expenditure. Although Parliament has in theory more autonomy in drafting estimates to cover the cost of the parliamentary administration, even this part of the budget is not generally accepted by Government without negotiating changes. Therefore, the overall budgetary impact of Parliament is small. At the same time, the parliamentary process appears to generate public debate on the budget. Deliberations in the plenary as well as the committees are open to the public and the media covers proceedings. The budget is given a formal statutory basis with Parliament s approval of the Law on Budget Execution. The Act differs from budget or appropriation acts used in many other countries in that it is mainly concerned with setting extensive and detailed parameters for the execution of the budget. It establishes a wide range of mechanisms and procedures which allow the executive to adjust spending in-year without recourse to Parliament (to be treated in the next section). Flexibility in budget execution is complemented with extensive in-year reporting from the Ministry of Finance including monthly budget implementation updates as well as a mid-year report. The parliamentary finance committee considers the mid-year report. Parliament also has a role in deciding significant changes to approved budgets. Typically, the approved budget for the second year of the two-year period has to be amended to take account of economic developments or policy changes. For this purpose, the Public Finance Act (Article 13a) requires the Government to submit its proposed amendments by 1 October of the year preceding the implementation of the approved budget for the second year. This need not be the case, however. In 2004 the Government refrained from tabling any amendments to the second year budget ahead of the elections. Officials in the Ministry of Finance pointed out that in this way the two-year budget process pre-empts an electoral budget cycle effect with negative implications for fiscal prudence. 75